Will the Real Leaders Please Stand Up

Having had the chance to have a short break I would like to comment on the ongoing pantomime of the Trump administration in the United States and some controversy arising from the Batman by-election regarding refundable franking credits and tax reform ahead of the 2019 federal election in Australia.

Taxation in Australia

In each case a quote from Malcolm X rang loudly in my ears, “A man (person) who stands for nothing will fall for anything.”

Let’s start with taxation policy. The problem that is being attempted to be solved is that our country has now been in deficit for a decade with no end in sight. There are some economists who believe that deficits themselves are not a problem and that government must step in when private enterprise won’t whilst most business people would hold the view that it is a poor look if the country can’t live within its means without properly reviewing where the issues lie and fix the areas that are broken.

From what I can gather Mr Shorten initially announced that he intends to wind back tax imputations from dividends. Subsequently he has clarified that those who pay tax will be excluded as will charities and not for profits and those who receive some age pension.

Background - Dividend imputation was introduced in 1987 to prevent double taxation. Company profits were taxed before they were distributed to shareholders as dividends. It effectively made the dividends tax free. Peter Costello in the Howard government took this a logical step further in which taxpayers who were not subject to taxation at the company rate were allowed a refund of the excess tax such that the marginal tax rate of the taxpayer was the tax rate across all forms of income. The rhetoric at the time described the company tax as an instalment toward the final tax. If not refunded, it represents in the mind of the coalition a double tax.

The continuing commentary suggests the clear target of the policy as being those who are considered “rich” being the self-managed superannuation sector that have been encouraged and incentivised for 35 years to provide for retirement rather than rely on the government to fund the age pension.

Like all government policy though, the ripple effect will not end with the targets of policy. Unintended consequences can and do arise. Ultimately though, what happens with bad policy is that the revenue is not raised to the extent intended, the problem that was sought to be solved is not solved and there is great angst and anxiety created along the way. My reading suggests those who are supported by disability support trusts and other protective mechanisms will be caught. It is often not the so called “rich” who will bear the brunt of the policy as they will have the means to change investment profiles and will always be more nimble in adapting to tax policy than the vulnerable and disadvantaged. An election based on tax reform appears inevitable but I’m not sure we are framing the conversation correctly.

Consider this very simple analogy when thinking about who is “rich”

· A couple have $800,000 in their SMSF.

· This amount excludes them from any age pension entitlement under the assets test.

· With a conservative portfolio they earn 5% return

· Income – 3% gives $24,000 plus maybe $10,000 franking credits

· Growth – 2% helps keep up with the CPI increase in living expenses.

I don’t think anyone would consider this largesse needing to be attacked. In fact, the standard of living is about the same as the full age pension which the taxpayer pays for and would be tax free if held outside the superannuation environment under the senior Australians income tax offset.

Presumably the policy intent is for income shortfalls to be made up by selling assets which will diminish future returns and paradoxically place more strain ultimately on the transfer system (centrelink) by bringing more customers into the age pension. That is unwinding most of my lifetime of government policy!

On the other side of politics, the coalition seem determined to bring in a tax cut for companies on the basis that we will lose business if we don’t rather than any positive reason to do so and a punitive tax on the biggest banks as their targeted attack on the unpopular rich. This is my fundamental problem. Both parties are engaged in petty one upmanship that ultimately won’t get the job done and are targeting a small proportion of society in a divisive manner. It is not the specifics that bother me greatest, it is the culture of the debate dividing our nation into the rich that need to be targeted and the others who don’t to solve a common problem being that we are in deficit year in year out and structurally need to change something to right the ship.

My solution - For quite a while now, I have thought that a broadening and/or increase to GST is the fairest way to simplify revenue collection in a world of transfer pricing, intangible businesses like Uber and a breakdown of what sovereign tax represents. A complete overhaul of the transfer (centrelink) system is needed to properly protect the vulnerable in light of a broad based GST which disproportionately impacts on the less fortunate. One hopes we manage to rise above the base adversarial commentary based on personality and see over the horizon to what is right in the 2019 election and beyond.

US Administration

When talking of low standards, how can one go past the USA and by extension the presidency and people in positions of power generally. When school aged children are able to say what everyone is thinking but those in power are unable to do anything else other than vote with their feet and resign there is a cultural problem within the Trump administration. A fish rots from the head. More broadly, one wonders if the disgust of the west felt by the zealots in the east is only solvable by an increase in standards from Hollywood, from celebrities and from government. This might go quite a bit further than general respect for women and reform around gun control in a country that seemingly has lost its compass on many areas of leadership in the face of undeniable evidence.

I do think for the good of our kids and their kids that we need as individuals making up society for the real leaders to please stand up, to say enough is enough. Inch by inch society can choose to raise the bar, to expect more of each other and to stop sweeping everything under the rug. It is not a bad thing to incentivise those who are able to achieve be that through the tax system or any other system. High achievers are not the enemy! Vote in politicians who stand for what is right rather than what is popular. Try very hard to see beyond “what is in it for me” to what is good for society as a whole and be prepared to lose doing your best whilst playing the game with integrity rather than the “win at all costs” and “the end justifies the means” mentality that leads to things like nuclear bombs being thought to be a good idea!

As individuals and collectively, we all need to lift. That’s my take.